June 06, 2010

The Betcha.com Online Gambling Concept—Groundbreaking, Or Too Clever by Half?

In preparation for watching the recent oral arguments in the Washington supreme court for the Rousso v. State of Washington appeal, I also watched the oral arguments in the appeal argued immediately prior, Internet Community & Entertainment Corp. v. Washington State Gambling Comm’n (a/k/a the "Betcha.com" case). My purpose in watching the Betcha.com argument was twofold—to get a baseline feel for how the justices questioned the attorneys, and also to see how the justices approached another case arising from the Washington Gambling Act. As a bonus, the same attorney, Jerry Ackerman, argued both appeals for the state. As I remarked in my prior discussion of the Rousso arguments, I felt Ackerman had a stellar performance in the Betcha.com argument, but was less polished and more challenged by the court in the Rousso argument.

This past week, reader Matt B. sent me links to two posts by Nick Jenkins, founder of Betcha.com, on his personal blog discussing his view of the oral arguments. The first post was on May 29, two days after the oral arguments, while the second post was on May 31. The blog posts were a rather interesting insight into how Jenkins as a party to the case viewed the oral arguments.

By way of background, Betcha.com was an online gambling site with an interesting, and likely unique, business model. Essentially, Betcha.com would permit users to post potential wagers (e.g., "I'll give 4-1 odds against Tiger Woods winning a major in 2010"), and other users could choose to accept those wagers. Betcha.com would then charge a small fee for matching up bettors for the accepted wagers, and would also escrow the funds wagered until the bet was resolved, paying off winners. As Jenkins described the website, it was meant to be an "Ebay for bets".

Now, this obviously sounds like an online sports book, and bookmaking tends to be illegal under most state gambling laws. This is where Betcha.com's unique hook comes into play—under Betcha.com rules, every bettor understood and specifically agreed that all bets were made on an honor system, and were completely unenforceable. Before bets were paid, bettors were given an option to "welch" on a losing bet and refuse to pay. The only repercussion was that the winning bettor might post negative feedback about the "welcher" and the "welcher" might lose "honor points" (honor points were a way to rate bettors, and users proposing bets could restrict acceptance to bettors with a set minimum honor rating). This provision was intended to get around a requirement in the Washington Gambling Act that gambling occurs when "... risking something of value upon the outcome of a contest of chance ... upon an agreement or understanding that the [winner] will receive something of value" if he wins. Betcha.com's contention is that, where the players agree that their bets are uneforceable, there is nothing at risk, and they cannot have the requisite "agreement or understanding" that the winner will be paid to constitute illegal gambling (think of Betcha.com as sort of an online version of a "gentlemen's wager").

Not surprisingly, the state of Washington authorities took a somewhat different view of Betcha.com, and swooped in, shut down the operation, and seized the company's assets. Washington authorities also apparently coordinated with Louisiana authorities to create a felony gambling charge under Louisiana law (based on $35 in bets made by a Louisiana state trooper, which netted Betcha.com a whopping 70 cents in profits). Jenkins was even extradited to Louisiana.

Back in Washington, a trial court judge in the civil forfeiture action ruled that the Betcha.com business model was illegal gambling and bookmaking. On appeal, the Washington court of appeals ruled (in a split decision) that the illegal gambling and bookmaking statutes were ambiguous and thus could not be applied to Betcha.com. The state appealed, and the Washington supreme court agreed to review the case; this in itself is a bad sign for Betcha.com, as a state supreme court rarely exercises discretionary review in a case unless: a) there is a constitutional issue, b) there is a split among lower courts on a legal issue, or c) the court intends to reverse an erroneous ruling. The first two reasons don't apply to Betcha.com, so the grant of further review is rather ominous in itself.

The oral arguments before the Washington supreme court were also unsettling to anyone wanting a Betcha.com victory. The court seemed to accept many of state attorney Ackerman's points, while Betcha.com's attorney, George Telquist, was on the defensive through almost his entire argument. The justices seemed to accept the state's position that, merely because the wagers were unenforceable didn't mean that the bettors lacked an expectation that the bets would be honored, and thus fell within the definition of illegal gambling. On the bookmaking argument, the justices focused on the fact Betcha.com received a fee from every wager, regardless of whether the bet was ultimately honored. The justices seemed inclined to regard this fact as fulfilling one of two possible statutory methods for establishing bookmaking (accepting a fee for placing bets, or accepting a bet itself). Although it is impossible to predict appellate rulings solely from oral arguments, the court during arguments clearly appeared more persuaded by the state's position than Betcha.com's position.

In his blog posts, Jenkins seems to agree that the oral arguments went poorly, and that the Washington supreme court seemed inclined to rule against Betcha.com. Jenkins asserted the justices likely had not read the appellate briefs prior to argument. In my personal experience, I find that contention to be highly unlikely as a matter of general practice, and based on the court's questions, it seemed to me that the justices were asking important questions about the parties' main arguments, consistent with the arguments raised in the parties' briefs (available online at the Washington court website—search by argument date of May 27, 2010).

Jenkins also vented that the Washington supreme court had simply rejected what he felt were clear and obvious legal points in favor of Betcha.com's position. Although the court seemed to disagree with Betcha.com's arguments, that doesn't mean that the court was engaged in illogical reasoning, or misunderstood the arguments. Sometimes, a court understands an argument perfectly, but just isn't buying the argument a party is selling.

My knowledge of the Washington Gambling Act is limited to reading the briefs and watching arguments in both Betcha.com and Rousso. But, I think Betcha.com's argument, while creative, is too clever by half. As the state argued, traditional gambling debts with bookies are technically unenforceable, and technically a loser never has to pay off a winning wager. Nonetheless, traditional gambling is clearly barred by statute. If Betcha.com's argument is accepted, traditional bookies could circumvent the law by merely telling gamblers—with a wink and a nod—that they had no obligation to pay if they lost. Similarly, the Betcha.com argument on bookmaking would arguably make the bookmaking statute unenforceable against traditional bookmakers who do not book wagers, but merely charge a fee for matching up bettors. This interpretation would allow anyone to open an online sports gambling site (or a site allowing gambling on any future event, say, the Oscars or an election) without regulation, basically making the bookmaking statute superfluous (a result that courts disfavor).

Although I am in favor of legalized online sports gambling, and the actions by the state seem vastly disproportionate to any real risk posed Betcha.com's fledgling operation, I think the most likely result is a ruling finding that Betcha.com violated the state's illegal gambling and bookmaking statutes. Betcha.com's arguments are certainly creative, but the "welching" option really feels like a gimmick to skirt the law. A ruling in favor of Betcha.com would likely render the state's gambling statutes virtually unenforceable against traditional sports bookmakers, and I doubt the Washington supreme court will want to open that particular door. Still, it is an interesting case to keep an eye on.